Lessons from the December 2018 market correction, when the SP500 and NASDAQ dumped more than -20% (by intraday measures) from all time highs

by cefpodoxime

www.marketwatch.com/story/the-sp-500-is-on-the-verge-of-tumbling-by-the-most-it-has-ever-fallen-on-christmas-eve-2018-12-24

I wonder if anyone here remembers the market ‘crash’ in December 2018. Pundits blamed the market plunge on Fed hiking rates, the ‘china trade war’, and fears of economic slowdown. But recall that 1) the market recovered in a V shape days after December ended, without the Fed deciding to reverse course on the rate hike, 2) that the market was unfazed by trade war headlines nearly all year long, and 3) the economic growth data remained incredibly positive and strong. The December 2018 drop was irrational.

This look back at recent history goes to show how irrational markets can be and it is up to us to take advantage.

For today:

  1. the Fed is NOT raising rates and have said this repeatedly.
  2. the economy is recovering and there is little data suggesting any upcoming slowdown or recession.
  3. The fear now is about the fear of inflation/yields rising. Note that we don’t have any data suggesting inflation is permanently here to stay.

I think there are two solid conclusions:

1) This is not a bear market happening before our eyes. It’s a correction and buying the dip is the likely right move. An overall selloff right now, is irrational, just like in December 2018, with the exception of growth stocks that are very overvalued especially in the context of rising yields.

2) No one can predict how deep this correction goes, but it would be prudent to buy the dip on cyclicals, financials, and growth stocks that are already undervalued

Please also note that the SP500 is now so heavily weighted to the top market cap growth tech stocks like FANG, that a 10% correction in them will require 90% increase in the bottom 100 stocks of the SP500 to avoid a fall. So the best way to increase your portfolio CAGR may not be to simply buy the dip in the SP500 index, but rather choosing the above sectors or stocks that avoid this weighting.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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